Incomplete Contracts, the Port of Gaza and the Case for Economic Sovereignty

In this note, we reconsider the notion of ‘economic sovereignty.’ We argue that a small country may need to invest in assets of the sort of a port even when the common scale-economy argument indicates that using a port of a neighbouring country will be more cost effective. The reason for such an investment would be purely strategic, as the sovereignty of the parties involved prevent them from writing down enforceable contracts. We show that such second-best strategic investments are likely to show accounting losses. The specific example of port of Gaza is used in order to make the analysis more vivid, and to demonstrate the pitfalls of policy recommendations based on standard first-best technological argument.